Investment and administrative committees for employer-sponsored retirement plans have long been the gold standard for a company to carry out its fiduciary obligations to plan participants as required by the Employee Retirement Income Security Act of 1974 (ERISA).

What about your welfare plan?

A slew of lawsuits against retirement plan fiduciaries caused a restructuring of the decision-making process for retirement plans, but the same committee structure, documentation, training, and decision-making process has not always been implemented for welfare plans despite the same fiduciary obligations under the law — and plaintiffs’ lawyers are catching on.

Johnson & Johnson and Wells Fargo 2024 litigation

This year, class action lawsuits were brought first against Johnson & Johnson, then Wells Fargo, alleging that the companies failed to effectively manage their prescription drug plan. The lawsuits allege that many of the prescription drugs covered by the plan were much more expensive than purchasing without insurance. The Wells Fargo case also alleged the company was paying its pharmacy benefit manager (“PBM”) excessive service fees.

The argument goes like this: The plan fiduciaries failed to monitor the costs of the prescription drugs covered by the plan and the fees charged by its vendors. That led to unnecessary spending by the plan, which, in turn, led to increased premiums and cost-sharing for participants. The plaintiffs concluded those actions (or inactions) amounted to a breach of fiduciary duty.

Both plans at issue were funded through a trust, which is likely favorable to the plaintiffs under their legal theory. However, unfunded plans which pay claims from a company’s general assets (which is the vast majority) do not get a pass and are still subject to these same types of attacks.

These cases are still in the early stages, and a court ruling could go either way, but there are steps you can take today to minimize risk.

What are ERISA’s fiduciary duties?

ERISA imposes various fiduciary obligations (the highest known to the law) on those charged with overseeing the administration of the plan and the investment of its assets. Fiduciaries must act:

• with undivided loyalty and in the best interest of plan participants;
• for the exclusive benefit of plan participants; and
• with the care, skill, prudence, and diligence that a prudent person would employ.

These duties have spurred the creation of fiduciary committees within a company to act as the plan administrator. The committee is typically composed of a cross-section of the workforce, holds quarterly meetings, discusses, debates, interviews and oversees vendors, hires experts, oversees the administration of the plan, and, most importantly, documents the process.

How to run an effective welfare fiduciary committee

In the context of the J&J and Wells Fargo lawsuits, welfare plan fiduciary committees, with the assistance of experts (like consultants and attorneys), should:

• Review service agreements with vendors (like the PBM, TPA, network, consultant, broker, etc.). It’s essential to know how much all vendors are getting paid and, with your consultant’s help, periodically benchmark those fees to make sure they are in line with the market.
• Ask your consultant to review and benchmark the cost of prescription drugs (or other mental health and medical services) and the amount of rebates received.

Committees should be created through formal corporate action (typically a delegation by the board of directors or managers), have a written charter that outlines the scope of the committee’s authority, and keep minutes to document the committee’s decision-making process.

Take note: The process the committee undergoes in order to arrive at a fiduciary decision is many times more important in reducing litigation risk than the decision itself.

This article appeared in the August 15, 2024, issue of The Journal Record. It is reproduced with permission from the publisher. © The Journal Record Publishing Co.